The Biggest Financial Mistake Millennials Are Making

As a fellow Millennial, I know what you’re going through. We were just old enough to realize the financial impact of September 11th and the tech bubble. We were starting to become actual adults as the as The Great Recession rocked us to our financial core. Our generation was severely impacted by that event. Jobs were scarce and the ones we could find didn’t pay that well. Add sizable student loans into the mix and it’s no wonder we had to move back home. As a result, we have a much different financial view than our parents, which is good and bad.

Compared to our parent’s generation, we are much better savers, which is a great habit to have. Baby boomers historically spent most of their income and saved a smaller portion of their income for retirement. Baby boomers were also able to take advantage of an incredible bull market that ran from 1987-2000. We see ourselves more as “savers” and not “investors.” Therein lies the problem.

Most Millennials are risk adverse when it comes to the market and that makes sense given the market conditions we’ve seen in our young adult lives. We make have taken it to the extreme. In fact, about a quarter of us are investing like our grandparents. Four out of five of us aren’t investing in the stock market and according to a BlackRock survey, Millennials on average allocate about 70% of their investments in cash2.

 Here are three issues with investing in so much cash:

1)      With interest rates so low, cash has a return of virtually zero. Since the prices of goods and services consistently increase (inflation) we can pretty much guarantee that the value of your cash decreases over time. If inflation averages 3%, then the value of your cash will be worth half as much as in 24 years.

2)      The market will go through its ups and downs. The good news is that you have time to recover from any market corrections. Most investors overreact to a short term market correction and that can have a significant impact on their return. Historically the S&P 500 averages an annual return of 8%.

3)      You can take advantage of your youth. Compounding interest can be a wonderful ally. If you start investing $2,000 per year at age 22 and earn an average rate of return of 8%, by age 62 you’ll have $561,562. The earlier you start investing the less you’ll have to save later in life in order to catch up.

Investing can be intimidating, but often in life stepping out of your comfort zone can provide the best rewards. If you’re a Millennial and you’re holding a lot of cash right now because you are afraid of the short term impacts of the market you may actually end up costing yourself in the long run.  

1 Harris Poll on behalf of Stash, March 2016

2  BlackRock Investor Pulse Survey, July/August 2015